Although it has been famously said that nothing is certain but death and taxes, this may be more true of the former than the latter. What is certain is that when a death takes place, somebody has to face up to the task of settling any related tax issues. This article attempts to throw some light on the subject.

When the deceased has left a will behind, it will state who is to act as executor and who is to inherit the estate. Where no will is left, that is known as an intestacy. The estate will then be administered by an administrator appointed by the High Court. The persons who inherit, usually family members, will then be determined under the law of intestate succession.

Syariah law applies to the inheritance of assets left by Muslims, who have only a limited ability to pass their property by will. Their estates are dealt with in much the same way as under intestate succession. The responsible persons, often referred to collectively as “the executor”, will need to consider capital taxes as well as income tax.

CAPITAL TAXES

There is no estate duty or inheritance tax in Malaysia so unless the deceased died domiciled in a foreign place, these taxes can be ignored.

Real property gains tax will also be of no consequence on death even if an asset has not been owned by the deceased for more than five years because a disposal on death is deemed to take place at the deceased person’s acquisition price, i.e. a no gain/no loss transaction. Executors themselves have no liability to tax on transferring an asset from the estate to a legatee as this is not a disposal.

However, if the legatee subsequently disposes of the asset within five years of its transfer to him he must treat its market value at the time of transfer as his acquisition price. Also, if the executor disposes of an asset of the deceased, otherwise than to a legatee, within five years of death, that is a chargeable disposal on which the market value at the date of death is deemed to be the acquisition price.

Example

At the time of his death on 15 May 2005, Samuel owned two commercial properties. He bequeathed the one in Ipoh to his son James and the executor transferred it to James on 1 February 2006 when its value was RM2 million.

James sold the property for RM3 million on 30 November 2010 incurring incidental costs of RM30,000. The property in Seremban, which was valued at RM2.75 million at the date of Samuel’s death was sold by the executor to a third party at arm’s length for RM4 million on 30 September 2010.

James has a liability to real property gains tax because he sold the Ipoh property within five years of his deemed acquisition date (1 February 2006). The tax is calculated as follows:

No tax is payable on disposal of the property at Seremban as the sale took place more than five years after the deemed date of acquisition (15 May 2005).

INCOME TAX - THE DECEASED

The executors are assessable and chargeable to tax on income of the deceased for the year of assessment in which he died and, where necessary, any previous year.  Any income of the deceased received by the executors, which would have been the individual's chargeable income if he had not died and had received it himself at the same time is also included. Different kinds of income are dealt with in different ways. Income from rents, interest and dividends is not apportioned and is treated as income at the time when it becomes receivable (provided that it is eventually received).

Example

Mr. Tan, who passed away on 4th March 2011, owned one property, a bungalow, which he had rented out on a two-year tenancy with a rent of RM5,000 per month payable monthly in advance on the first day of each month. The rent due on 1st March 2011 was paid late and it was collected by the executor after the date of death.

The executor should include the whole of the 1st March rent item, once it is received, as income of the deceased as it was receivable during Mr. Tan’s lifetime. It is not apportioned. The rents due from 1st April onwards will be income of the executor.

Deductions are given for property expenses in the normal way.

Where the deceased carried on the letting of property as a business, rents and expenses are included on the accruals basis. Where the deceased was in business as a member of a partnership, the death has the effect of terminating the partnership but the remaining partners will normally continue the business under a new partnership.

All rights and duties, which would have attached to the deceased with respect to his chargeable income pass to his executors. This means that the executors have the right to claim deductions for such items as are appropriate on his behalf including personal deductions for wife, children etc and to be taxed at graduated rates if the individual was resident in Malaysia. The personal deductions are given for a full year and not apportioned up to the date of death

Assessment of any income of the deceased must be made by the end of the third year of assessment following the year of death. However, the executor is required to submit a self-assessment return and any income so reported is deemed to be assessed automatically. The executor must retain and not distribute any assets of the estate unless he has provided in full for any tax which he knows or might reasonably expect to be payable by him. However, he can only take responsibility for what comes into his hands and, for this reason, he is only liable to the extent of what is received by him. 

INCOME TAX – THE EXECUTOR AND THE ADMINISTRATION PERIOD

Traditionally, the executor is given one year, known as the administration period, in which to take charge of the assets, administer the estate and pay all debts, but this period may be shorter or longer than one year. The executor is liable to income tax on the income of this period. When the administration is completed the executor will hand over to the beneficiaries their shares of assets including any income which the executor has received during the administration period. No tax is payable by the beneficiaries on this income.

Where assets are not to be distributed to beneficiaries but are to be held in trust, the provisions relating to trusts will commence to operate at the end of the administration period.

If the deceased person was domiciled in Malaysia at the time of his death, the personal deduction is currently at RM9,000, but no other personal deduction is given for each year of assessment during the administration period. Tax is charged at the graduated rates applicable to a resident individual.

Richard Thornton is author of 100 Ways to Save Tax in Malaysia for Property Investors (ISBN978-983-2631-83-5) and 100 Ways to Save Tax for Malaysian Investors (ISBN978-967-5040-42-9) published by Sweet & Maxwell Asia. See http://malaysiaauthorindex.com/wiki/Richard Thornton. He is also a Fellow of the Chartered Tax Institute of Malaysia.

The two works referred to immediately above contain some valuable insights on how to achieve legitimate tax savings for investors in property and other assets as well as dealing with complex issues such as “When can an investor be taxed as a dealer?” and “Is it a good idea to use a company?” Written in clear simple language, the books contain helpful examples to explain how the tax planning ideas can be put into action. They can be obtained from most book stores, or from the author at ricton100@gmail.com

A review of the second edition of this popular book which sets out to arm property investors with new tax-saving ideas

The returns from property investment can certainly be maximised where a potential earning leakage in the form of tax is effectively handled. For the astute investor who has recognised this fact, the publication of the new second edition of 100 Ways to Save Tax in Malaysia for Property Investors by popular tax author, Richard Thornton, is certainly to be welcomed. Some four years after the initial publication of this book, the time is ripe for an update to arm property investors with new tax-saving ideas.

The book is prepared in very simple and engaging language. It makes taxation so simple and manageable and is sure to change the perception held by many about taxation. Complementing the clear text are useful and instructive examples which help to enhance the understanding of the various taxation principles and rules as well as tax mitigation ideas. To ensure that readers do not miss any keys points “Simple Planning Ideas” are highlighted in most chapters.

Comprehensive Guide

100 Ways to Save Tax in Malaysia for Property Investors is a comprehensive guide to the tax implications of property investment. As a work that collects together in one source all of the tax issues relevant to property investment, it is an invaluable tool to help investors in their vital decision-making processes. It is a companion work to 100 Ways to Save Tax in Malaysia for Individuals and 100 Ways to Save Tax in Malaysia for Small Businesses by the same acclaimed tax author. The book covers the specifics of the taxation of property income, which is in many ways distinct from the taxation of other kinds of income. The availability of deductions against rental income is discussed with clear examples. In addition to dealing with the taxation of property income, the book covers other areas of taxation including investment holding companies, real estate investment trusts and assessment tax which have relevance for the property investor. Tax-saving strategies which include tax deferment, tax reduction and elimination of tax liability are explored with practical illustrations. The chapter on this provides examples which are really useful to help property investors appreciate the actual possibilities that lie behind proper tax planning.

Mitigating RPGT

Besides a wealth of tax-saving ideas for long term investors, the book also has useful tips for people seeking to exploit the property market by realising short term gains and some useful strategies for mitigating real property gains tax. The revised and expanded chapter on RPGT also includes the calculation of the tax, family gifts and the potential trap, computations through the exempt period, the 2% withholding tax and the new loss relief. With RPGT very much in the mind of investors again, this more detailed coverage of the topic should be most welcomed.

For the unwary investor who might otherwise stray over the line by dealing with properties in such a way that a profit on sale becomes liable to income tax, useful guidelines and examples are provided. Stamp duty which is a significant cost for property investors is also covered by the book including the implementation of advance stamp duty. A new chapter on assessment tax highlights the impact of rates charged by local authorities which are often overlooked as a form of tax by property investors.

For the easy reference of readers, appendices to the book provide the applicable tax rates, relevant Inland Revenue Board Public Rulings as well as the meaning of certain important expressions. 

Whether you are a new property investor or an experienced one, a Malaysian or a foreign investor, an individual or a corporate investor, this book contains a wealth of ideas to help you to minimise the taxes you have to pay and to plan your future actions so as to pay as little tax as possible. This book aims to make the understanding of tax issues affecting property investment easy by using simple everyday language and practical examples to illustrate them. It is certainly a book not to be missed by property investors, tax consultants, real estate consultants, estate agents, lawyers, landlords and anyone with an interest in property income.

It is understood that this book will hit the bookstores in early February 2011. Grab it when it is available. It is worth every bit of the RM60 that it costs. For further information, contact the publishers Sweet & Maxwell Asia at (T) 603-56330622, (F) 603-56330657, or visit its website www.sweetandmaxwellasia.com.my.

Richard Thornton is author of 100 Ways to Save Tax in Malaysia for Property Investors (ISBN978-983-2631-83-5) and 100 Ways to Save Tax for Malaysian Investors (ISBN978-967-5040-42-9) published by Sweet & Maxwell Asia. See http://malaysiaauthorindex.com/wiki/Richard Thornton. He is also a Fellow of the Chartered Tax Institute of Malaysia.

The two works referred to immediately above contain some valuable insights on how to achieve legitimate tax savings for investors in property and other assets as well as dealing with complex issues such as “When can an investor be taxed as a dealer?” and “Is it a good idea to use a company?” Written in clear simple language, the books contain helpful examples to explain how the tax planning ideas can be put into action. They can be obtained from most book stores, or from the author at ricton100@gmail.com

SHOULD I USE A COMPANY TO HOLD INVESTMENT PROPERTY?

Property investors are often perplexed about the tax implications of using a company to hold their investment properties. Doing so can bring some advantages but the pluses and the minuses need to be weighed carefully.

ON THE PLUS SIDE

A 20% income tax rate. This can give a useful tax saving when personal tax rates are high. As the highest personal tax rate is currently 26%, there is a potential 1% advantage even when the company pays tax on all of its income at the principal rate of 25%. But the real advantage is seen when the company is entitled to use the small company rate of 20% on the first RM500,000 of chargeable income. For a company to be eligible for the lower rate in any year, it must be an independent company with a paid up ordinary share capital of not more than RM2.5 million at the beginning of its accounting year.  When the alternative to company ownership is ownership by an individual with a substantial income, there is a potential for tax saving of at least RM30,000 every year (RM500,000 x (26% -20%)).

A simple example:

Mr. Lim, a successful lawyer earning RM1 million every year, is contemplating the purchase of a suite of offices from which he expects to derive a rental income of RM600,000 per annum after deducting expenses of RM200,000. As the top slice of his income, this would attract a tax liability of RM156,000 (RM600,000 at 26%). However, if he sets up a company to hold the asset, the company can expect to pay tax of RM125,000 (RM500,000 at 20% plus RM100,000 at 25%). There would be no further tax implication if the company paid out the after-tax income to Mr. Lim as a dividend.

Another plus (perhaps) – income spreading. Until fairly recently, a property investment company could also be used to spread income around within a family if the shareholdings were arranged so as to give each member the right to dividends. When the dividends came with a tax credit (26% at present rates) shareholders who were taxable at lower rates could claim a tax repayment. Unfortunately that no longer works as virtually all dividends are single-tier dividends which come with no tax credit.

Some spreading can still be achieved where a company is able to pay out directors fees and claim a full tax deduction for them. This would be beneficial when some directors were paying tax at low rates. However, it is easier said than done because a personal investment holding company is usually unable to claim more than a token tax deduction (the permitted expenses deduction) for directors fees or indeed any other expenses of management and administration.
A full tax deduction is possible when the company is eligible to be taxed on the basis that it is carrying on a business of letting properties. (In default the company is treated as carrying on a passive investment activity.) This may be achieved by:

Nevertheless, it must be stressed that neither method (ii) nor (iii) will achieve the objective unless the company avoids being classified as an investment holding company. See below.
Tax benefits when rent is treated as business income. These can be very substantial, not only in terms of income spreading. There is much more that can be said about this topic and it will be covered in detail in a later article. The article will elaborate on matters such as loss reliefs, capital allowances and improved expense deductions.

WATCH OUT FOR THE DRAWBACKS

The 20% rate does not apply when the company is involved with another company which has a paid up ordinary share capital of more than RM2.5 million and either company owns more than 50% of the paid-up ordinary share capital of the other; or a third company owns more than 50% of the paid-up ordinary share capital of both of them.

Only the limited permitted expenses deduction is given to a non-listed company which is taxed as an investment holding company. This deduction is given for a proportion of specified expenses including directors’ fees, wages and salaries, management fees and various other professional fees as well as rent and expenses of maintaining an office. The proportion is calculated by reference to the different types of income of the company but the proportion can never exceed 5% of the gross income from dividends, interest and rent chargeable to tax. (Exempt income is disregarded). Consequently, the scope for paying tax-deductible directors’ fees is minimal. Space constraints do not allow for setting out the whole calculation but the following generalised example might help.

Example
Assuming that Mr. Lim in the example given above would like the company to pay his wife (who has no other income) a director’s fee of RM109,000, not more than RM40,000 ((RM600,000 + RM200,000 x 5%) of this would be tax deductible for the company.  Although Mr. Lim’s wife would pay tax of RM14,325 (being the tax on RM109,000 minus the personal relief of RM9,000) on her director’s fee, the company would get tax relief of only RM10,000 (RM40,000 at 25%). Not only is there no tax saving, there is a net cost of RM4,325.

An unlisted company may be classified as an investment holding company for any year unless it is able to show that it is not. It can do so by satisfying the requirement that its activities do not consist mainly in the holding of investments. If it is not able to satisfy that requirement, then it may still qualify by showing that less than 80% of its gross income (whether exempt or not) is derived from such activities.
Satisfying the first requirement will depend mainly upon how the company describes itself in its statutory reports. The second test, which must be examined every year if necessary, is a matter of calculation. For this purpose, rents from properties where maintenance and support services are provided are treated as non-investment income.

Example:

ABC Realty Sdn Bhd, an unlisted company, describes itself as a property investment company. Its gross income for the year to 31, March 2010 consisted of:
 

Although the activities of ABC Realty Sdn Bhd seem to consist mainly in the holding of investments, it is not an investment holding company for tax purposes for the year of assessment 2010 because its gross income from investments (RM20,000 + RM55,000) does not amount to 80% of its gross income.
 
For readers who wish to know more, the two books mentioned below are recommended.

Richard Thornton is author of 100 Ways to Save Tax in Malaysia for Property Investors (ISBN978-983-2631-83-5) and 100 Ways to Save Tax for Malaysian Investors (ISBN978-967-5040-42-9) published by Sweet & Maxwell Asia. He is a Fellow of the Chartered Tax Institute of Malaysia.

Some smart tax savings after the 2010 budget

Confused by RPGT? Intricacies of RPGT explained by a tax expert

After an absence of three years, real property gains tax has been reintroduced. Bad news for some, but it is not all doom and gloom on the tax front. Would-be investors should not be put off because there is plenty of good news, and that is what I want to tell you about.

The new-style real property gains tax is less painful than the earlier version

The tax applies to all disposals of real property from January 1, 2010 but only where the property was acquired within five years before the date of disposal. The most obvious tax saving strategy is just to postpone the disposal until the five-year period has expired as there will then be no tax to pay.  Normally, you can plan this exactly, but there are exceptions. 

The seller’s disposal date, as well as the buyer’s acquisition date, is normally the day when the sale and purchase agreement (SPA) is signed. For the seller, the two relevant dates are the date of his disposal and his original acquisition. However, if there is no SPA, the disposal (and the corresponding acquisition) is deemed to take place on the date when the ownership is transferred to the acquirer or when the whole of the purchase consideration has been received by the acquirer, whichever is earlier. Even when there is a SPA, if there are prior conditions to be fulfilled such as the exercise of an option or the obtaining of official consents, the disposal date (and the corresponding acquisition date) will be pushed forward until the conditions are fully satisfied. It is worth understanding how this works so that you do not get caught out. A miss is as good as a mile! 

What is also good news is that everybody gets an exemption capping the final tax rate at only 5% of the amount of the chargeable gain. (A chargeable gain is the excess of the disposal price over the acquisition price after taking into account adjustments for allowable costs). For many, this is much better than the previous system under which rates were as high as 30% in the initial years of ownership. It is particularly good news for companies. At that time only individuals ceased to be liable for tax after five years of ownership. Individuals who are non-citizens and non-residents will also benefit. Previously they were liable to tax at 30% throughout the first five years of ownership.

Beware though. The exemption capping the tax rate at 5% for all is given under a statutory order but the Real Property Gains Tax Act 1976 itself still provides for tax at rates of up to 30%. Withdrawing the exemption at some point in the future would be a very simple matter so it is unwise to assume that either the five-year period or the 5% rate is set in stone. These are the tax rates that would apply in the absence of the statutory order:

The separate exemption given to a resident individual on each disposal has been improved. Now, it is  RM10,000 (previously RM5,000) or 10% of the chargeable gain whichever is greater. This means that the effective rate of tax is never more than 4.5%, and it might be considerably less if the chargeable gain is below RM100,000. For individuals who habitually book properties on new launches, doing the sums might well show that any real property gains tax payable on a disposal within five years of acquisition will be less than the cost of holding on to the property.

An example might help to illustrate this:

One tax-planning route still left open to individual taxpayers is to claim the once only exemption for a gain on the disposal of a private residence within five years of the date of acquisition and pay no tax. Provided that the building is occupied or certified fit for occupation as a residence, the owner need not have occupied it himself. There are other hurdles to overcome but the main consideration here must be weighing up the advantage of saving 5% tax on the current disposal against the loss of opportunity to use the exemption ever again during your lifetime. The gain might be much larger (and the tax rate may be higher) when the next opportunity comes along!

Enjoy a stamp duty exemption for a Green Building Index certificate.

The certificates are awarded to developers of residential and other properties who adhere to certain environmentally friendly building methods. Besides giving a tax break to the developer, they can benefit the buyer of a property by exempting him from stamp duty on a proportion of the purchase price. The proportion is based on the additional cost incurred by the developer to obtain the green certificate. As the highest rate of stamp duty on the transfer of property is 3%, charged on values in excess of RM500,000, this could give the buyer a useful tax saving.

Investment in REITs is tax-efficient.

The special tax rate on income distributions to non-corporate investors has been maintained at the reduced level of only 10% up to the end of 2011. After that it is likely to go back to the 20% rate that applied before 2009. The tax is deducted at source.

REITs, or real estate investment trusts, are quoted funds set up for the purpose of investing in real property, usually commercial buildings, for income. The investor buys or subscribes for units on which he can expect to be paid an income, based on the income earned from rents and other property income. In spite of the 10% deduction at source, it is a tax-efficient investment by comparison with a direct interest in property because 10% is all the tax there is to pay. The income of the REIT itself is exempted from tax provided that 90% of the income is distributed to unit holders every year. Also there is no stamp duty for the investor to pay on acquiring the investment nor real property gains tax on disposal.